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UK COMPETITIVENESS SUMMARY 3.5.1 Profile / reputation Value and importance of games industry to UK not widely appreciated or understood In 2000, the UK's expenditure on leisure software exceeded spending at the cinema box office and on VHS and DVD rental (however, note that cinema box office only makes up 30% of revenue from films). Exhibit 37: UK leisure purchases for comparable industries, 2000 (m units) cinema box office Source: Screen Digest - Interactive leisure software, market assessment and forecasts to 2005 In 1999, the UK games industry created exports of £482m, in line with TV, but significantly less than film. In the previous year film exports were actually lower than those from leisure software 30 . Exhibit 38: Export values for comparable industries, 1999 (£m) 1,200 1,000 800 600 400 200 632 0 481 VHS and DVD rental 1,104 VHS and DVD retail 2,018 music software 1998 1999 leisure software Note that while the value of exports of leisure software declined from 1998 to 1999, so did the value of imports into the UK and that the positive balance of trade in leisure software actually increased from £219m to £276m 31 . 24 Competitiveness analysis of the UK games software sector Main report 934 Film TV Leisure software Source: Screen Digest – Interactive leisure software, market assessment and forecasts to 2005 30 Source: Screen Digest - Interactive leisure software, market assessment and forecasts to 2005 31 Source: Screen Digest - Interactive leisure software, market assessment and forecasts to 2005 The importance of the industry to the UK economy is not widely appreciated, however. Financial institutions, in particular, have a far more limited awareness of the games industry than they have of other creative industries. And there is as yet no specific Standard Industry Classification (SIC) code for games - the design and development of games software is currently classified under "software consultancy and supply", whilst publishing of all games software is classified under "other publishing" and the manufacture and wholesaling of video games is classified under "miscellaneous toys". The low profile of the industry is due to lack of communication both at the business and consumer levels. Until very recently the industry had little attention from Government, certainly in comparison to the film or TV industries. Most notably, the film industry has secured both funding from Lottery receipts and a unique framework of tax breaks for investors. There is no doubt that the film industry has managed to build its profile on the back of mass-market consumer appeal, and a glamour that appeals to consumers and policy-makers alike. The games industry is unlikely to develop this type of profile, particularly given the hitherto 'niche' demographic of hardcore gamers to which it has appealed. However, most games companies have done little high profile advertising, or marketing - preferring specialist press and in-store promotions. Sony's mass-market promotion of the Playstation is the singular, and highly important, exception to this rule. "Sony did more for the profile of the industry than anyone else. Their marketing campaign transformed games from geeky to cool. They are the reason that we are now targeting 26-year-old males" [Publisher] Games companies are beginning to increase their mass market marketing spend and profile. For example: games can now be seen on supermarket shelves and petrol stations and hit games are being advertised on mainstream television channels (e.g. Xbox and Halo). Following the launch of the Xbox and Gamecube, the profile of games in the mass media is likely to grow once more. The Industry as a whole could benefit from this enormously. In addition, publishers, through ELSPA, are aiming to lift reviews of games onto the same pages as book, film and video reviews.
Poor press and perception of games - 'violent, 'antisocial', 'waste of time' This is an important issue for the industry as a whole and something that ELSPA has been active in addressing. Video games have been subject to negative press for many years with accusations of violence in games engendering real violence and more general suggestions that playing video games is low on the pecking order of entertainment activities. There is mixed opinion about whether this is a key issue for the industry. Most interviewees were concerned about the perception that video games are inferior pastimes to film and TV. This concern ties in with the general opinion that the games industry needs championing and profile raising at every level. Perception of the industry as not offering serious career potential The UK games industry has its roots in the programming enthusiasts who made full use of the early Sinclair Spectrum computers. This gave the industry a "hobbyist" culture, which has persisted to this day, and to some extent gives the industry a reputation for not being able to offer structured career opportunities. There is certainly a lack of a clearly defined career path for people who enter the industry, as has been established for film and TV. This issue is discussed further in the skills section below. 3.5.2 Access to finance UK financial community has a limited understanding of the nature of the games industry The exploitation of IP is the key to the development of cash flows by which both developers and publishers can invest in future growth. However, in order to fund development and to build IP ownership (discussed below), significant investment is required. Beyond investment from within the industry, or government bodies, the main options for financing growth centre on the financial community: • Private equity - venture capital, business angels • Public equity - including AIM for smaller companies • Banks - loans, guaranteed loans, completion bonding 32 Source: Spectrum games industry interviews UK COMPETITIVENESS SUMMARY Both developers and publishers have historically had difficulty communicating with and gaining the support of the financial community. There are only a few publicly listed companies in the UK today - e.g. Eidos, SCi, Argonaut, Bits or Warthog. Some, such as Codemasters, have attempted flotation but encountered difficulties in doing so. More are wary of floating because of the additional work and maintenance required to keep shareholders happy. "I have considered it, but wouldn't do it. It takes up so much time in meetings and paperwork that you can't run the business anymore" [Established developer] Private equity funding is also difficult to secure. The UK has few business angels, many of whom are more likely to invest in film than games due to the former's higher profile and industry-specific tax allowances. Venture capitalists have limited interest in funding games companies because the investment required typically falls below their minimum thresholds. For example, Argonaut's early £2.4m VC funding in 1996 was well below APAX's standard threshold of £5m 32 . Other companies interviewed had been forced to find alternatives to VC funding for this reason. Another factor that discourages private equity is the lack of a clear exit route for the investor, due largely to the problems that the games industry has in tapping public equity markets. The only alternative exit option for a private investor is therefore acquisition by a larger player. The key concern is that the financial institutions frequently do not have a sufficiently developed understanding of the nature of the industry to enable them to judge what is or is not a sound investment. Those that have considered raising money through the city have received poor reactions for the following reasons: • There are very few brokers specialising in the games industry. Most institutions still group games with other software or entertainment products, so there is limited understanding of the idiosyncrasies of the industry Competitiveness analysis of the UK games software sector Main report 25
Page 1 and 2: From exuberant youth to sustainable
Page 3 and 4: Contents 1 Introduction 4 1.1 Purpo
Page 5 and 6: Preface This report presents the fi
Page 7 and 8: 1.1 Purpose and scope of the study
Page 9 and 10: • Broker/analyst reports - These
Page 11 and 12: This chapter provides an introducti
Page 13 and 14: Exhibit 5: UK and other leisure sof
Page 15 and 16: 2.3.3 Progress to mass-market for g
Page 17 and 18: We project the value of the mobile
Page 19 and 20: 3.1 Outputs This chapter summarises
Page 21 and 22: The key priority for the UK industr
Page 23 and 24: Thus, of the 20,000 people employed
Page 25: A key threat is new development tal
Page 29 and 30: "When you look at the level of comp
Page 31 and 32: • "I want to encourage the course
Page 33 and 34: The UK is at a turning point in its
Page 35 and 36: The core focus of our analysis was
Page 37 and 38: Few independent development studios
Page 39 and 40: Like the development sector, the UK
Page 41 and 42: 4.2.3 Publishing sector challenges
Page 43 and 44: Finding an effective cost model - n
Page 45 and 46: The distribution sector employed ov
Page 47 and 48: Insufficient competition The retail
Page 49 and 50: 5.1 Conclusions The UK games indust
Page 51 and 52: Exhibit 56: Action prioritisation s
Page 53 and 54: Action 8: Directory of private sect
Page 55 and 56: Action 15: Establish DTI backed UK
Page 57 and 58: Action 21: Define career paths for
Page 59: From exuberant youth to sustainable

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